Bubbles Are the Super-Rich's Best Friend

More

S&PvsGDP2.png

What's better than stocks for the long-run? Stocks for the short-run. As long as you pick the right short-run. 

The above chart compares real GDP with quarterly inflation-adjusted S&P prices, both indexed to 100 in 1947. They've gone up roughly the same amount the past 65 years. They've just taken very, very different paths to get there.

Who cares? The top 0.1 percent, that's who.

The fortunes of the super-rich are closely tied to the fortunes of the markets. It wasn't always this way. In the three decades following World War II, markets jumped considerably, but there was considerable little jump in incomes for the top 0.1 percent. Then things changed. After 1980, markets and top-end incomes began moving in tandem. Inequality spiked.

The rentiers have returned. But rentiers wouldn't be quite so rich if the rents they extracted weren't, well, so damn high. That's where bubbles come in. Consider the above chart. Up until the mid-1990s, stocks and GDP moved within a decently narrow band. Stock overperformed in the 1960s, underperformed in the 1970s, and caught up in the 1980s. Then they really took off around 1998 or so. We've been living in a bubble economy pretty much ever since.

It's not immediately obvious why this is good news for the super-rich. Frothy markets have given back vertiginous gains once the boom has turned to bust. So have top-end incomes. But this misses a key point: the top 0.1 percent aren't necessarily the same people year-to-year. And that creates all kinds of perverse incentives.

On Wall Street, it's known as "I'll-Be-Gone, You'll-Be-Gone" (IBGYBG). Traders don't worry about the long-term consequences of their trades. They know they'll be long-gone by the time any trades blow up -- past bonuses in hand. The boom-bust cycle is worth it to them. And it gives them every incentive to pump up a bubble and ride it while it lasts. 

They've become the ultimate day-traders. Except instead of trading individual stocks, they're doing so with the economy.

The story of the super-rich rising and rising isn't just about them latching onto markets. It's about markets unlatching from any economic fundamentals -- or rules. With better regulation and enforcement, it's hard to imagine either of our most recent bubbles going quite so far. Mortgage fraud was systemic during the housing bubble, while underwriting standards collapsed during the tech bubble. The top 0.1 percent reaped enormous rewards. Few else did.

If we want to get serious about inequality, we have to get serious about fixing our markets.
Jump to comments
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Get Today's Top Stories in Your Inbox (preview)

A Delightful, Pixar-Inspired Cartoon About the Toys in Your Cereal Box

The story of an action figure and his reluctant sidekick, who trek across a kitchen in search of treasure.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Juice Cleanses: The Worst Diet

A doctor tries the ever-popular Master Cleanse. Sort of.

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Video

What If Emoji Lived Among Us?

A whimsical ad imagines what life would be like if emoji were real.

Video

Living Alone on a Sailboat

"If you think I'm a dirtbag, then you don't understand the lifestyle."

Feature

The Future of Iced Coffee

Are artisan businesses like Blue Bottle doomed to fail when they go mainstream?

Writers

Up
Down

More in Business

Just In